Rightsizing Government

Executive Summary

State and local governments now face a series of unprecedented challenges: budget deficits, bloated workforces, decaying infrastructure, shrinking tax bases, citizen opposition to new taxes, and taxpayer-imposed tax and spending limitations.

A new breed of public-sector managers, inspired by the successful streamlining of American business are trying to meet these challenges—not by increasing taxes or government spending—but by fundamentally transforming government through a process called rightsizing.

Rightsizing means establishing clear priorities and asking questions that successful companies regularly ask, such as: If we were not doing this already, would we start? Is this activity central to our mission? If we were to design this organization from scratch, given what we now know about modern technology, what would it look like?

A roadmap to rightsizing government would include these six key strategies:

Competition. “Opening up city hall to the competitive process must be the fundamental aspect of change,” says Indianapolis Mayor Stephen Goldsmith. Since taking office in January 1992, Goldsmith has shifted over 50 government services into the marketplace by making city departments compete with private firms to deliver public services. Savings: $28 million annually.

Activity-Based-Costing (ABC). Few governments know how much it costs to deliver most public services. Without such data, it is impossible to know if city costs are competitive with those in the marketplace or how scarce tax dollars could be best allocated to serve citizens.

By attaching explicit costs to individual activities, and measuring the costs versus the efficiency and effectiveness of service outputs, ABC systems can provide an important tool for controlling costs and increasing productivity in the public sector. ABC brings to light costs which previously were hidden allowing managers to determine where they need to get costs down. ABC systems also lead to more accurate cost comparisons between in-house and contracted services when governments bid out services.

Entrepreneurial, Performance-Based Budgeting. Government typically rewards managers for poor performance: if crime goes up, police departments receive more money; if student test scores go down, the schools are given more cash. Poor outcomes lead to more inputs, rather than an improved process.

A number of political leaders are changing these perverse incentives by overhauling the annual budget process. Milwaukee's new budget is “performance-based”: success is measured according to outcomes, not inputs. Managers submit five strategic objectives and are held accountable for achieving these outcomes. Rather than measuring the number of road crew workers, for example, the Road Maintenance Department is judged according to the smoothness of the streets.

For performance budgeting to work, mayors and governors must hold the line on spending by freezing or capping budget allocations to each department. Capping spending growth helps create a culture where managers see their purpose as maximizing their accomplishments with available resources rather than trying to grow their budgets.

Focusing on Core Businesses. Across the country, governments operate all kinds of enterprises and programs far removed from the central missions of government. Does the city of Dallas really need its own classical radio station? Should New York City be operating off-track betting parlors? In order to provide high quality basic public services, governments should concentrate on doing fewer things better.

Some noncore services—such as zoos, museums, fairs, remote parks, and some recreational programs—can be turned over to nonprofit organizations. Other city assets—such as airports, water systems, utilities and parking garages—can be sold to the highest bidder. All over the world, such enterprises are being privatized, allowing governments to turn physical capital into financial capital.

Reengineering. In the private sector, companies are saving millions of dollars and increasing productivity by radically rethinking and redesigning work processes. This practice, called reengineering, helped Union Carbide cut $400 million out of its fixed costs in just three years.

If pursued aggressively, reengineering could lead to dramatic productivity gains in the public sector. For example, installing document-imaging technology—whether in the courthouse, police station or welfare office—can eliminate the need to store millions of paper files. Dallas expects to realize significant space savings and handle court document requests with 10 fewer employees a year through document imaging. Yearly savings: $250,000.

Reorganizing Work Structures. Government's organizational structures, management systems, and job classifications also need to be reinvented. Rightsizing governments are tearing down rigid hierarchies and replacing them with flatter, leaner, and more flexible structures. They are organizing employees into self-managing work teams focused on their customers rather, and empowering them to make many decisions independently of department directors.

These rightsizing strategies and others are being employed by America's leading public-sector innovators to fundamentally transform government. They represent the cutting edge of government innovation, and hopefully, the future of state and local government.